Wenran Jiang is a senior fellow at the Institute of Asian Research, University of British Columbia, and a global fellow at the Woodrow Wilson International Centre for Scholars in Washington.
Among U.S. President Donald Trump’s one-against-all global trade war rhetoric and practices, China is by far No. 1 on the hit list. From the campaign trail to the White House, Mr. Trump has accused China of “raping” the United States, of accumulating large trade surpluses, of imposing barriers to market access and stealing intellectual-property rights.
When the gloves came off recently, with the United States unilaterally announcing tariffs on US$50-billion worth of Chinese imports followed by another US$100-billion, Beijing reacted swiftly with similar countermeasures. Most observers expected a prolonged showdown between the world’s two largest economies that, in the end, would produce no winners.
Yet barely two months later – and after just two rounds of negotiations – Washington and Beijing issued a joint statement that is conciliatory and without hard targets and specific commitments. The trade war is “on hold,” as U.S. Treasury Secretary Steven Mnuchin first put it, and he even went back to correct himself by saying the confrontation “was never a trade war” but a “trade dispute.” The Chinese side simply called it what it is: a ceasefire.
So, what drove both parties to compromise from the brink of a full-blown trade war?
First, the initial exchanges of punches bruised both sides and neither appeared to want the injuries to become more painful. The United States delivered a potential death sentence on ZTE by imposing sanctions against one of China’s largest and most successful telecom companies, which relies on 35 per cent of its core chip components coming from U.S. sources. Washington said the measure is all about reinforcing legal actions related to ZTE’s violations of sanctions against Iran and North Korea. Beijing sees it as a hostage in the looming trade war.
In retaliation, the Chinese put out a tariff list targeting a range of U.S. exports and key U.S. soybean-producing states, such as Indiana, Ohio and Michigan – all battle grounds for both the midterm elections this year and presidential election in 2020. Without even applying the tariffs, Chinese orders of U.S. soybeans have virtually stopped in the past few months, a well-timed blow to Mr. Trump and the Republicans fighting to win coming elections in those states.
Second, the moderates and the moderate-minded have prevailed, for now. Behind Mr. Trump’s harsh words on China, he has never said anything negative about Chinese President Xi Jinping, a tactic that leaves him plenty of room as the ultimate deal maker. And when Peter Navarro, the White House trade adviser and most hawkish China critic clashed with his own team during the first round of talks, he was demoted to a supporting role in the second round, with Mr. Mnuchin and Commerce Secretary Wilbur Ross – both advocating a less hostile approach – taking centre stage.
On the Chinese side, vice-premier Liu He, a long-time friend of Mr. Xi, has presented himself as a mild and steady hand at the table with sweeping decision-making authority. He promised to work hard to resolve bilateral trade imbalances and other issues, and announced first-stage tariff reductions on U.S. auto imports from the current 25 per cent to 15 per cent. This is less than the 2.5 per cent the United States demanded but is viewed as moving in a positive direction. While Beijing proposed to import large quantities of U.S. agricultural goods, potentially worth US$60-$90-billion, Washington has hinted that if satisfactory conditions are met, it may resume supplying ZTE with U.S. chips. Thus, both have managed to instantly turn the stick into a carrot and claim victory at the same time.
Third, the United States still needs China’s help in Mr. Trump’s planned meeting with North Korean leader Kim Jong-un. While Mr. Trump was launching a full assault on China with tariffs, he was beaming for a Nobel Peace Prize moment, assuming the summit is a done deal. But after Mr. Kim made not one, but two surprise visits to China in a short span of 40 days, his attitude hardened. Mr. Trump is now openly speculating that Mr. Xi might have gambled wisely to gain leverage. Whatever the case, Mr. Trump has recognizedthe summit may not be a sure thing and that he is not the only guy calling the shots on the future of North Korea. He needs to play nice with Beijing in the short term.
There are good reasons for both the United States and China to keep the truce in place while working for long-term solutions on a balanced economic partnership.